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No US Fiscal Crisis, Yet

The US does not face an imminent fiscal crisis in the short term, but things look very different over the long term according to Ian Shepherdson, the US economist at High Frequency Economics.

“A country that can fund its 10-year borrowing at 3.3 percent compared to 4 percent before the banking crash, despite a massive increase in the deficit, is not in any sort of trouble,” Shepherdson said.

“Part of the reason for this is surely that that the dollar is the world’s reserve currency, and yes, that does mean the US can play by different rules because everyone needs dollars,” he said.

Running a deficit of nearly 10 percent of GDP is not sustainable, but this will be greatly reduced if growth continues to rebound and tax revenues keep rising, he added.

“Cutting spending to offset a plunge in revenues triggered by a monumental recession is very risky, as Britain is now finding out.”

Take the Long View

Over the longer term things look very different for the US, Shepherdson said.

"The key problem facing the US is the rising cost of healthcare, reflecting both the aging of the population and sharply rising costs for drugs and medical technology,” he said.

“The choices are straightforward: cut entitlements; raise taxes permanently; ship in millions of smart young immigrants to reduce the dependency ratio; grow the economy at a faster sustained rate: or, eventually, default,” Shepherdson said.

People will not vote for lower entitlements, so the age at which people can qualify for Medicare will have to rise, he said.

On immigration, Shepherdson said it will be a few years before employment rises to levels that will allow a reasoned debate and despite the Tea Party movement, taxes will eventually have to rise sharply.

“Our core view is that the deficit will fall sharply in the next few years due to growth, and that politicians will use that as an excuse for inaction.”

“The current squabbling over the 2011 and 2012 budgets, by the way, is little more than a sideshow,” he said.

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